There's no doubt that massive changes are coming to the United States. However, they won't all happen quickly. Some of these changes may not occur for decades.
But other changes might be happening much sooner than we realize. Already policies are being proposed to improve infrastructure, immigration, and even voting laws. And taxes may be the next thing that the United States government decides to reform.
President Biden made it clear during his campaign that he wanted to rethink how the government collects taxes and how much. But how will tax reform affect 2021 tax code changes and estate planning?
Senator Bernie Sanders unveiled a list of proposed tax code changes in March of 2021 that even covers federal estate taxes. This guide is here to walk you through the proposed changes and how they might affect your estate planning.
Estate Tax Threshold
This refers to the amount of money that people can gift to others tax-free throughout an individual's lifetime. Once you reach a certain amount, the overage gets taxed by a certain percentage. In this way, it is similar to an income tax.
This means that if a person dies with a certain amount of money in their possession, the money gets taxed before it reaches their heirs.
Proposed changes to 2021 federal estate taxes will not change how this functions. However, the values of numbers for tax-free gifts could change if the bill passes.
Suppose your estate is worth more than twelve million dollars. When it gets transferred to your heirs, a forty percent estate tax will be taken out first. This is for all estates that have a higher value than the tax-free gift threshold.
Proposed changes to these laws will lower the amount for tax-free gifting to $3.5 million. For married couples, this number would become seven million dollars. New policies would also increase the amount of estate taxes taken out in this case as well.
Currently, if your estate is worth more than twelve million dollars, then when it gets transferred to your heirs there will be a forty percent estate tax taken out first. This is for all estates that have a higher value than the tax-free gift threshold.
The new policies mean the amount of estate taxes taken out would increase and would no longer be a single flat rate. Instead, the new tax rates would be:
- Forty-five percent for estates worth less than ten million dollars.
- Fifty percent for estates worth between ten million and fifty million dollars.
- Fifty-five percent for estates worth between fifty million and one billion dollars.
- Sixty-five percent for estates worth over one billion dollars.
Again, these numbers will apply to the amount of overage from the estate tax threshold. For tax purposes, the IRS calculates the value of your estate based on both money and assets.
Capital Gains "Step up"
When you inherit assets, you inherit them at the value of that asset at the time of the person's death. Under the current rules, if you sell that asset, you only pay capital gains taxes on any increase in the asset's value since the person's death. Whereas the proposal is to tax the total value of the asset. This appreciation in value is the asset's capital gains "step up."
In this case, two different things need to be done to maximize the amount of tax-free money from the inheritance. The first is that the original owner must hold off on selling assets until their death. The second is that the heirs must sell the assets as quickly as possible before too much appreciation on the value of the asset occurs.
If the heirs follow these steps, then they should pay very little in capital gains taxes when they sell the assets.
This will no longer be the case if the proposed tax changes pass. They would remove capital gains "step-up" entirely. In other words, if you inherit an asset, you will pay capital gains taxes on the total value of that asset rather than only the appreciation of the asset.
If these changes are made, it would be wise for estate owners to reevaluate their plans for certain assets. For example, it may be best to sell assets before death rather than leaving them to your heirs in some cases.
Trusts
Trusts have been a common way for people to transfer wealth to their beneficiaries tax-free. Some types of trusts are not considered part of a person's estate and are therefore transferable with few if any taxes.
A grantor trust, for example, allows assets to be gifted and separated from the estate. So while the assets would still be treated as if you own them on your income taxes, these assets will grow without income taxes being taken out of them. And for estate tax purposes, they are not included.
This makes them a valuable tool to transfer assets to your heirs. They are also used in installment sales to prevent the value of an estate from increasing or decreasing.
However, the proposed changes would change all of this. Grantor trusts would then be considered part of your estate and would therefore be subjected to estate taxes when you die.
This means that if you own any grantor trusts, then it may be best to complete any installment sales now before these proposed tax changes are made.
Prepare for 2021 Tax Code Changes and Estate Planning Today
If you own a large estate, don't let yourself or your heirs be caught off guard by a possible new 2021 tax code. Even if these changes aren't put into place until January of 2022, it is best to be prepared now.
You need a qualified and trusted attorney to help you with estate planning in 2021. Eric Beutel is an estate planning attorney and is ready to help all families in Northern Kentucky keep their money in the family.
Don't wait. Book your free consultation today and start planning for your estate's future.